The Rochester Review, University of Rochester, Rochester, New York, USA

ReView Point

An occasional column of faculty opinion

The Third Industrial Revolution

By Jeremy Greenwood

Something has been puzzling a lot of economists, and other people, about computers.

They were supposed to make businesses more efficient and people more productive, but you won't find evidence of that in national productivity figures. To the contrary, you might argue that the computer revolution has actually dampened productivity, because a fall-off in postwar rates of productivity coincides with a dramatic upsurge in the nation's investment in information technology.

From the 1950s to the early 1970s, labor productivity grew at about 2 percent a year. After 1974, when investment in computers really started to take off, spurred on by rapidly declining prices, productivity fell to a sluggish 0.8 percent a year.

You also could argue that information technology has widened the gap between earners at the top and bottom of the economic spectrum. From 1959 to 1970, the gap between the average wages of workers in the top 25 percent of earners and the average wages of those in the bottom 25 percent was roughly constant, with top earners making 53 percent more than those in the bottom quartile. But from 1970 to 1988, that gap increased by a whopping 22 percentage points, so that in 1988, top earners were making 75 percent more than those at the bottom.

We are wired to the hilt, and yet our rates of productivity have dropped, and wage inequality has grown. What's going on?

We are in the midst of the Third Industrial Revolution, a time of rapidly changing technological progress like 18th-century England when the steam engine was introduced, or 19th-century America when electricity's potential was discovered. While those technologies eventually heightened productivity and raised standards of living for all, the benefits did not happen immediately.

Moreover, income inequality rose during the Industrial Revolution. The Industrial Revolution began in 1760 and witnessed the birth of several technological miracles. Crompton's mule revolutionized the spinning of cotton, and Watt's energy-efficient steam engine brought steam power to manufacturing.

A highly-skilled labor force played a key role in the adoption of new technologies. For instance, it took three months for someone brought up in a mill to learn how to operate either a hand mule or a self-acting mule. The former required three years to learn how to maintain, while the latter demanded seven. Workers needed to continually update their knowledge of the machines throughout their lifetimes.

Demand for skills rose in the Industrial Revolution in order for the economy as a whole to switch from making things by hand to making things with machines.

This put skilled labor at a premium and thus temporarily produced greater income inequality. Productivity also slumped temporarily: Before the Industrial Revolution, productivity was growing at 0.4 percent a year. With the coming of the new era, it fell to an annual rate of 0.2 percent.

This period of teething pains, as the labor force adopted new technologies,
lasted for 40 years. But as the revolution spread, productivity growth picked up. Seventy years into the revolution, the economy was growing at a much more robust 0.5 percent.

The electricification of America also illustrates delays in adapting new technologies. It was clear by around 1900 that electricity could light homes and businesses, but it had yet to supplant water and steam as a source of power in manufacturing.

This didn't happen immediately because there were large stocks of equipment and structures already in place designed to use water or steam. In the early stages, electricity tended to be overlaid onto existing systems: Electric motors might power a group of machines using systems of belts and shafting originally designed for steam and water power, for example.

But by 1910, people had figured out that machines could be driven with individual electric motors, and that had a huge impact on productivity in the workplace. The belt-drive apparatus used in the group-drive system could now be abandoned. Factory construction no longer needed to allow for the heavy shafting and belt housing required for the group-drive power transmission.

Also, the people needed to maintain this system could be reassigned to other tasks. Flexibility in the production process rose because the entire power system no longer needed to be shut down for maintenance. Machines could be moved freely to accommodate the production process. Last, the workplace was made considerably safer.

An astute observer in 1890 might have predicted the importance of electricity for lighting homes and powering factories. He wouldn't have predicted how it would transform future lives through inventions it would spawn: radio, television, and computers.

Today, it's taking time for the world economy to reap the harvest from the information technology revolution. Adopting new technologies is costly. Setting up and operating new technologies demands highly skilled laborers, so in times of rapid technological advancement, income inequalities between the high-skill and low-skill people grow.

This disparity tends to shrink over time for two reasons: First, more people will choose to become skilled. Second, as new technologies mature, the level of skill needed to work with them declines. Firms will then replace skilled workers with unskilled ones because the latter cost less.

These two forces lower the economic premium on skill. Over time, information technology advances will increase labor productivity, as more work can be accomplished without battalions of clerks, pools of secretaries, scores of purchasing agents, and layers of supervisors and administrators.

How will this affect people's lives? In the long run, everybody gains. When more output can be produced by each unit of labor, a unit of labor becomes more valuable: Everyone enjoys higher wages and standards of living.

Everybody today is clearly better off because of the British Industrial Revolution. But it took time for the fruits of the first Industrial Revolution to ripen, and it will take time for everyone to share in the fruit of the Third Industrial Revolution.